Does Your Wealth Structure Have An Escape Mechanism?

Building flexibility into a Wealth Structure is essential. Many advisors lead their clients to believe it is a binary choice – you can have a structure that is either flexible but provides little asset protection or inflexible but provides strong asset protection. 

A middle ground exists. 

Delicate Balance

Creating flexibility is easier said than done.

The ability to easily and endlessly make changes provides too much flexibility and will compromise a structure’s ability to adequately protect against attack. For example, a judge can effectively control a revocable trust’s assets by threatening the settlor or trustees with contempt of court.

Alternatively, if structures are overly rigid, they cannot be adapted to account for changing desires and circumstances. 

Striking a balance requires an advisor to devise a structure with flexibility that also provides strong asset protection.

Flexibility also requires advisors to put their client’s interests first. Unfortunately, many advisors lock structures in their home jurisdiction to secure their own involvement in all future moves.

Strategic Flexibility

Designing an appropriately flexible structure involves building legal “escape mechanisms” into things like trust agreements and foundation governing documents that allow for changes to be made under certain circumstances.

These escape mechanisms must define the specific circumstances under which changes to the structure are permitted, the types of changes that are allowed, and the individuals authorized to make and/or approve the changes.

For example, it is generally not a good idea to give the structure’s principle the unfettered ability to amend or revoke a structure. The reason being is that a judge wanting to access the structure’s assets to satisfy a judgment could simply order the principal to amend or revoke the structure and use its assets to pay the judgment. Failure to comply could result in a contempt charge landing the principle in jail until he complies. 

This can be achieved, for example, by having a trust that requires the consent of its protector for major changes to be made. 

Selecting a protector located in a separate jurisdiction from the principal (or others in which lawsuits are most likely to occur) protects the structure’s assets from direct control of courts in the principal’s home jurisdiction.

In addition to the particularities of a structure’s principal (desires, fears, succession planning goals, family governance, etc), the latticework of its entities and escape mechanisms must also account for the legal consequences of actions both within and between each jurisdiction involved.

For example, a certain move that is tax advantaged within a jurisdiction can be net-negative on the structure as a whole due to international tax rules.

The multitude of variables at play make designing flexibility an artform.

Picking A Backbone

Choosing the right jurisdiction to serve as a structure’s backbone is the first step in securing flexibility.

Selecting the most appropriate jurisdiction reduces the need for changes and makes them easier if required. It’s a case-by-case basis decision that must take into account not only the laws as they currently exist but the jurisdiction’s willingness to modify and create law.

I’ve successfully lobbied a jurisdiction to alter its trust regime in a way that would benefit my client and similarly situated HNWIs.

Because virtually all Wealth Structures involve multiple jurisdictions, selecting the right jurisdiction to serve as a backbone can help isolate and confine problems to a certain element of a structure reducing the need for broad structure-wide changes.

A backbone jurisdiction should have:

  • Political stability
  • Tax treaties with major countries
  • Advantageous domestic tax laws
  • No language barriers
  • Access to banking
  • Reliable legal and regulatory systems

Changing Jurisdictions

A key strategy in securing flexibility involves redomiciling an entity (or even an entire structure) to a new jurisdiction.

The authority to redomicile should be built into the structure’s escape mechanisms and (generally speaking) the laws of the jurisdictions involved.

There are an infinite number of reasons for which you may need to redomicile, including the usefulness and desirability of the jurisdiction itself.

There is no such thing as a set-it-and-forget-it jurisdiction.

About five years ago a certain European jurisdiction seemed like a no-brainer for many Wealth Structures. But due to pressure from the OECD and the EU, it instituted onerous regulatory burdens making compliance overly burdensome and costly, which is causing the jurisdiction to lose its status and become increasingly unattractive.

Anticipate Rapid Changes

The Coronavirus has prompted governments to pass emergency economic packages that will need to be paid for. Politicians and bureaucrats never let a crisis go to waste – it should be expected that burdensome regulations will be snuck into legislation at the last minute.

Many HNWIs are already looking to significantly alter and redomicile their structures. Others are looking to build one for the first time.

What Flexibility Do You Need?

If you’d like to discuss your particular situation, you can contact us here.
Apply here for more information on Jimmy and his services.

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